A Brief History of Bitcoin

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Is Bitcoin a virtual currency or a “real” currency? Can a viable currency be independent of a government or bank? Why don’t you see people buying their morning coffee with bitcoin?

Brian Patrick Eha, author of How Money Got Free: Bitcoin and the Fight for the Future of Finance, explores the development and phenomenon of digital currencies, including Bitcoin. Brian shares the history of Bitcoin and explains how it works. He also suggests who could benefit from this kind of currency and delves into why it could be more relevant in the future.

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It turns out there’s a lot more to bitcoin than just a cryptocurrency, and I really want to dive into that. But Brian, give us a one-minute summary about what everyone should know about the state of bitcoin today.

Brian Patrick Eha: Bitcoin was created and released in January 2009, with the promise to be a truly universal currency; a form of electronic cash that could be sent around the globe in minutes, and it would work as well in Seattle as it does in Shanghai.

One of the revolutionary things about it is that the transactions all take place on a network that exists independently of any government or bank.

For the first couple of years of its existence, bitcoin had no real monetary value. Today, it’s worth about $4,000, which is remarkable growth in less than a decade. A report out of Cambridge University this past April found that the number of cryptocurrency users worldwide now rivals the population of small countries.

So other than perhaps the iPhone, or something like that, you’d be hard pressed to find a technology that has exploded as rapidly as bitcoin, and indeed, the whole area of cryptocurrency.

Widespread Use Of Bitcoin

Douglas Goldstein: How come I don’t feel that? In other words - first of all, I am a financial advisor in my day job - I don’t actually feel that people are using bitcoin. I see it around, or I see stories about it, but no-one’s ever tried to pay me in bitcoin, and I’ve never bought stocks with bitcoin.

BrianPatrickEha: I do think there’s a long way to go, in terms of penetration into people’s everyday lives. But one of the reasons is that there is a tremendous amount of inertia with the existing financial system in the developed world.

I should emphasize the developed world because there are smart people who argue that where bitcoin or some other cryptocurrency will truly make its major inroads initially is going to be in developing nations, where people don’t have access to traditional financial services.

For instance, there are two billion adults worldwide who don’t even have a bank account. The group gets even larger when you include people who are the so-called “under banked” – they may have some access to some form of financial services, but not the full panoply that we enjoy.

So, although bitcoin is used transactionally, there are people who have bought houses or cars through with bitcoin. Or paid their electricity bills in bitcoin, or a number of other things, and there are thousands of merchants around the world accepting it. Then certainly there are even a larger number of people speculating in it as a commodity.

You’re right that the average westerner is still using a credit card or something like that to pay many of his bills, and by “westerner” I mean, again, developed nations.

Douglas Goldstein: Well, that’s speculation, and it certainly makes a lot of people wonder, is this just another tool of mania that we saw in the 17th Century in Amsterdam, where people got so excited about something that didn’t really have value, because bitcoin has really nothing backing it?

BrianPatrickEha: This is a real false equivalence. A tulip is a tulip; it’s a flower and there’s not much that you can do with it besides display it on your mantelpiece, and then it wilts and dies.

Bitcoin is something that allows us to do something that we were never able to do before it existed. Namely, it allows you to send value from one side of the world to the other, in minutes, directly from person to person, without needing the permission or the infrastructure or any middleman, government, payment system, or bank.

Not only is this tremendously freeing, but it’s also tremendously powerful because of what people refer to as its “censorship resistance.” In other words, as long as you’re having to rely on PayPal, or a bank, or something like that to hold your money, send your money, your account can be frozen; something could happen to it in transit. Or you could end up in a dispute with your bank over some transaction that didn’t go through.

With bitcoin, you are your own bank, if you want to be. No one can prevent you from spending your money or sending it to whomever you wish.

Douglas Goldstein: This sounds a little bit shadowy, right? The reason that the banks, and PayPal and the likes have so many restrictions, or are able to restrict you so much, is largely because of government regulation. I would think that the moment that the government begins to sense that people are using this on a large-scale for illicit activities, they’ll find a way to regulate it. Or just put enough people in jail until they self-regulate. Isn’t that the direction that the governments would take if they want to control all of this?

BrianPatrickEha: Think of how paper cash is regulated. If you use it for criminal purposes and you’re caught doing so, you’ll certainly be thrown in jail. But you’re not going to be thrown in jail for using cash. You’ll be thrown in jail for the criminal activity that you are funding or paying for with cash.

Douglas Goldstein: It’s very hard to use cash. If someone comes into my office with $100,000 in cash or goes into a bank, that’s a very reportable event. It’s not only going to be an “Oh, no” problem. Yes, small money is no big deal, but it seems to me when people are dealing in big money, that’s what gets the attention of the regulators.

BrianPatrickEha: Certainly bitcoin presents some new challenges to law enforcement, but they have not really proven to be insurmountable challenges, at least not in some high profile cases such as the shutdown of the online black market, the Silk Road.

Different people may have their own views on the pros of allowing people to transact freely with one another electronically in the internet age, but with something that serves as a form of digital cash, or “digital gold”, in that you can sort of hand it directly from person to person, without going through a middleman. Some people will think that is on balance, a good thing, despite some of the downsides, and other people perhaps may feel differently.

The truth is, it exists, and it has value because of what it’s able to do and there are plenty of people who are interested in this, other than criminals.

The Philosophy Behind the Bitcoin Movement

Douglas Goldstein: Brian, as you’re talking about this, we’re actually moving from the technical side of the discussion about how a person will send some money from here to here, and I hear there’s a whole philosophy. It almost sounds libertarian. When you were researching for your book, what was the philosophy that you discovered about the people involved in the whole bitcoin movement?

BrianPatrickEha: Actually, even beyond libertarianism, there is this movement known as “crypto anarchy”. Crypto anarchists are essentially people who want to use encryption technology and peer-to-peer network culture to increase personal liberty and undermine the state.

As a philosophical movement, crypto anarchy emerged in the early 1990s in California, among a group of people who called themselves “cypherpunks”. They were organized around this electronic mailing list, not unlike the one on which Satoshi Nakamoto would later announce his invention of bitcoin. By the time bitcoin came along, crypto anarchists had been talking for years about the need for digital cash, but no-one could figure out how to make it work until Satoshi, who was inspired by some of these early efforts.

But you’re right that crypto anarchists were among the first to see the potential of bitcoin, and start using it. They and these kinds of digital libertarians found it tremendously interesting, even before it had the huge monetary value that’s now attracting a lot more mainstream investors and Silicon Valley types and so on.

Although you can say later on that some people even clashed with the ideals of these radical early adopters, ordinary people, maybe like you and me, would probably never have heard of bitcoin if not for these crypto anarchists.

What Is The Technology Behind Bitcoin?

Douglas Goldstein: It seems to me that another benefit of bitcoin is not just the currency itself, but the whole technology behind it that’s going to allow people to do much more than just send money back and forth. Am I on the right track here?

BrianPatrickEha: Absolutely. There’s something called the “Blockchain”, which is the technological breakthrough that makes bitcoin possible. It’s basically a decentralized, tamper-proof ledger for recording transactions. That sounds like the least sexy thing in the world. But the revolutionary thing about it is that it allows for transactions to be verified and recorded without the need for essential authority, or a third party, which normally would be a payments company, a government, or a bank. So businesses and services can be decentralized, which simultaneously cuts out middlemen and also removes any single points of failure in the system.

While a lot of financial institutions remain wary of bitcoin itself – not all of them, but many of them – they have seized eagerly on Blockchain technology because to them it holds a promise of huge cost savings in the back office and faster, better payments. They’ve all set up Blockchain logs and working groups to study it. In fact, I believe nine out of ten banking professionals, surveyed at large North American and European commercial banks, said their company was exploring the use of Blockchain tech for payments, and nearly one-third were in an advanced stage of adopting it. That was earlier this year.

Douglas Goldstein: Well, there’s certainly a lot changing in the field. It actually sounds like people who are interested in seeing the direction of the world of finance have to really begin to understand bitcoin and the whole Blockchain technology. Brian, it seems to me that one of the best ways for people to do that is to actually pick up a copy of your book. So in the last few seconds, tell us, how can people follow you and follow your work?

How to Follow Brian Eha

BrianPatrickEha: I am on Twitter – that’s probably where I am most active in terms of social media. My handle is @brianeha, and you can pick up the book in bookstores in the UK and in North America. You can pick it up at Amazon as a Kindle or as a hardcover book. Or if you like other e-book formats, it’s available through Apple’s iBooks or the Google Play Store, and a few others. So you’ve got a variety of options.

I am not actually sure about Israel, but I recently was sent a photo of my book being sold in the Singapore airport. So it’s possible it’s being sold in Israel, in physical copies as well. But that would be great.

Douglas Goldstein: Brian Patrick Eha, thanks so much for taking the time.